Recent statistics published by HM Revenue & Customs (HMRC) show there has been an increase in the number of estates paying Inheritance Tax (IHT).
In the tax year 2020-21, there were 27,000 taxpaying IHT estates – this was an increase of 4,000 (17%) on the previous tax year.
Figures also show that there was a 16% (£800 million) increase in IHT liabilities compared to the previous year. Part of this increase will be because of the COVID-19 pandemic and the increased death rate throughout the period. However, the increase in tax is the largest single-year rise in IHT tax liabilities since the 2014-15 tax year.
HMRC state that ‘IHT liabilities are now at their highest level on record, surpassing the previous peak of £5.05 billion in the 2016-17 tax year’.
Why the rise in IHT liabilities?
Rising house prices, combined with the freezing of the Nil Rate Band (NRB) threshold at £325,000 since April 2009, have been contributing factors to more estates being subject to IHT.
An increase in house prices means the value of the estate now takes up a significant proportion of the NRB threshold. After any available reliefs are deducted from the value of an estate, the standard rate of IHT is 40% – a rate of tax which can make a significant indent on the value of an estate remaining after payment of IHT.
Help reduce IHT liabilities
With careful estate planning, you can help to reduce IHT liabilities and ensure your wealth is passed onto your loved ones in the manner you wish. Most estates can benefit from several tax-saving provisions, including the NRB and the Residence Nil Rate Band (RNRB). There is also the potential availability of Transferrable Nil Rate Bands (TNRB) and Transferrable Residence Nil Rate Bands (TRNRB) which are often available on the second death of a married couple or a couple in a civil partnership.
The RNRB rules are complex, but broadly only available if your home forms part of your estate and the home will be inherited by your children or grandchildren (referred to as lineal descendants) – it is essentially in addition to the NRB and further reduces the value of your estate that is subject to IHT. The maximum RNRB per individual is currently £175,000.
For estates that are worth more than £2 million, the available RNRB is reduced by £1 for every £2 the estate is over the £2million threshold. Please note the threshold of £2 million specifically excludes having to factor in gifts made within the last seven years.
How M+A Partners can help
Get in touch with our experts below for further advice on estate planning and maximising the use of tax-saving provisions.